It's sad, really, that the best defense Coca-Cola (NYSE:KO) could come up with against charges it was snookering the public with deceptive advertising was that federal law doesn't let competitors file lawsuits against it, since that argument seems to validate the allegations. Perhaps worse for the soda maker is that not even the Supreme Court would buy into the argument. Although the high court didn't weigh in on the merits of the lawsuit, only that the case can proceed in lower courts, it represents a setback for Coke, at least in the court of public opinion.
Pomegranate juice maker POM Wonderful alleges the beverage company's Pomegranate Blueberry juice deceives the public into believing the drink is actually made mainly from those fruits when in reality it's almost all apple juice -- 99.4%, in fact -- with just a smidgen of blueberry and pomegranate added to allow Coke to claim otherwise.
Coke hasn't answered the charge of whether it's being deceptive, but instead maintains POM is prohibited from bringing a case against it because the federal Food, Drug & Cosmetics Act gives the FDA jurisdiction over labeling, and the regulatory allows beverage names to use the names of the juices providing the flavor, even if those juices don't provide the bulk of the contents.
POM countered that under the Lanham Act, private-party lawsuits are permissible to protect against unfair competition by misrepresentation of products. The juice maker says its own more expensive pomegranate blueberry juice is 85% pomegranate and 15% blueberry, and that the cheaper knockoff is hurting sales.
While the lower courts sided with Coke, the Supreme Court backed POM's case, saying that Congress had ample opportunity to speak on the competing regulations and, having chosen not to, is purposely allowing them to coexist, permitting competitors to bring civil lawsuits to protect their commercial interests, while also protecting public health and safety with FDA regulation. During arguments, Justice Kennedy suggested Coke had "a very difficult case to make" if it was arguing its label was fair to consumers.
That may be, but Coke probably has less to worry about in the courtroom than in the court of public opinion. Over the years, POM has sued other juice makers with similar claims, including PepsiCo, Ocean Spray, and Welch's, but has lost each time. But consumers are becoming more savvy about the foods they're eating and the beverages they're drinking.
Diet soda sales in particular have been rapidly declining because of concerns over the artificial sweeteners they use. According to Beverage Digest, Diet Coke volumes fell 6.8% last year while sales were down 6.9% as it's sold nearly 20% fewer cases of Diet Coke since 2007. Not even regular Coke has escaped the implosion, falling by around 10% over the same period.
Now as it becomes more widely publicized that its so-called pomegranate blueberry juice is virtually neither, containing just 0.3% of the former and 0.2% of the latter, consumers may feel indignant that they've been tricked.
Of course, POM Wonderful knows something about deceptive advertising, too, as the FDA and the FTC are pursuing it for health claims it's made about the benefits of pomegranates, saying they're not supported by science.
Regardless of how the court case turns out, Coca-Cola's attempt to juice sales by playing fast and loose with its labeling could cause consumers to sour its sales.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.